American politics

The fiscal cliff

Barack Obama's dual agenda

AMBIGUITY reigns in the twisting, turning dramatic series that is the fiscal-cliff negotiations. On Monday, it appeared Barack Obama and John Boehner were close to a deal. Liberals were angered by some of the apparent concessions: raising the income threshold at which tax increases kick in from $250,000 to $400,000 per year ("muddying the message", some cried), switching to chained CPI for social-security cost-of-living increases, accepting a two-year waiver on the debt ceiling rather than declaring it permanently off-limits for negotiation. But Mr Boehner blew that apart on Tuesday, rejecting the White House compromise and announcing a retreat to "Plan B": having the Republican House pass a bill that hikes taxes only for income over $1m per year, with no other spending measures or tax compromises. Had Republicans smelled weakness in the Democratic position? Or was Mr Boehner bolting because he was unable to get his tea-party wing online for any deal?

Then, on Wednesday, the game shifted further, as the conservative Heritage Foundation and Club for Growth both attacked "Plan B" as a tax-hiking sellout and warned Republican lawmakers not to vote for it. Was even Mr Boehner's symbolic conservative gesture of defiance too centrist? Were the Republicans falling apart, as John Chait argued? On the other hand, Grover Norquist's Americans for Tax Reform (ATR), keeper of The Pledge, declared it would issue an indulgence to any lawmakers who have signed the no-tax-hikes-ever pledge but vote for Plan B, on the casuistic argument that Plan B does not technically raise taxes on income above $1m per year, but prevents them from being raised on income below. Late in the day, Mr Boehner gave an exceptionally terse 51-second press conference, announcing the House will vote on Plan B. As that vote approaches today, the world watches with bated breath: will Mr Boehner hold his party together, prevent more than 24 representatives from defecting, and get the Republican House to pass a bill on strict party lines that (with apologies to the Jesuits at ATR) everyone in the world understands as a tax hike on millionaires? If he does, the bill is obviously going nowhere in the Democratic-controlled Senate. Will its passage lead to a new round of negotiations over a real compromise? Or will both sides allow the country to sail over the fiscal cliff, with Mr Obama hoping the public continues to blame Republicans for the failure of negotiations, while Mr Boehner hopes that the passage of Plan B allows him to blame it on Mr Obama?

The answer to that last question has a lot to do with the incentives facing Mr Obama at this point. It's not simply that he may get a better deal on taxes and spending cuts, from a Democratic perspective, if he allows the fiscal cliff to kick in on January 1st. It's also that letting the fiscal cliff kick in may better serve his other main incentive: dividing and weakening the Republican Party.

Mr Boehner's Plan B is an attempt to defray blame for the fiscal cliff onto Democrats, but if the country actually goes over the cliff, Plan B is unlikely to shield Republicans. Pressure from business groups and from taxpayers to reach a compromise deal before the economy suffers serious damage will become immense. Polls are consistently showing Americans more likely to blame Republicans than Democrats if negotiations fail. The president's initial $250,000 tax-hike cutoff still enjoys majority popular support; his secondary $400,000 cutoff is already a substantial compromise. The GOP is suffering tremendous political stress while the standoff continues, and that stress will become unbearable once tax hikes and defence sequesters kick in. Mr Boehner will have to come up with a Republican position that Democrats can accept, and it is likely to be very close to the offer Mr Obama put forth on Monday.

A vote over such a compromise deal would tear the GOP's congressional faction apart. However many Republicans defect on today's vote over Plan B (The Hill's count currently has 11 saying they'll vote no and 25 more no-comments and undecideds), a multiple of that number would refuse to vote for a real compromise with the Democrats. Democrats could achieve a fiscal-cliff deal by winning the votes of a couple of dozen moderate Republicans, but such a move would be electoral suicide for any Republican who tried it. Republicans will need to form a large bloc to give themselves cover for a compromise, but the larger the bloc, the more dangerous the division between the party's tea-party and moderate factions will be for its overall future.

Fostering the civil war in the Republican Party is crucial to Mr Obama's chances of getting any part of his agenda passed over the next four years. The top items on that agenda are climate-change legislation, immigration reform, and (suddenly) gun control, along with keeping up some measure of progressive stimulus until the economy is fully recovering. But if the Republican faction in the House stays as united as it has been for the past 18 years, only immigration reform has any chance of passing. If Mr Obama can crack Republican party discipline on taxes, he may be able to press the other items on his agenda as well. Alternatively, he can look forward to elections against a divided, angry GOP in 2014, and hope to go into the last two years of his term with a stronger position in the House.

Republicans have locked themselves into an impossible position on budgeting by simultaneously vowing never to allow taxes hikes, and passing long-term budgets that create a fiscal cliff necessitating tax hikes. It's in Mr Obama's interests to gain Republican cooperation to work out the best possible deal, but if that's not forthcoming, it's also in his interests to use the impossibility of the Republicans' position to weaken them. Back before the elections, Mr Chait wrote a piece distilling the thinking he'd heard from Obama aides on the budget debates. "The term that keeps popping up among Obamans is break," Mr Chait wrote, "as in, 'we have to break the Republicans on taxes.'" That strategy seems to be working out. Either Mr Obama is going to break the Republicans on taxes, or he's going to try to break the Republicans. On taxes.

With all the often inaccurate focus on the moment, very little has been said about the balance of power after 1/1/13. I read Democrats worrying about what Obama can get re: the debt ceiling. I read Republicans worrying about tax increases and defense cuts.

You know what this tells me? No one knows what the actual balance of power will be come 1/1/13.

I've commented before that individual GOP House members have no incentive to vote for tax increases, for a debt ceiling increase, etc. because they each have to run again starting in a year or so and any opposition will come from the side of the party that will castigate any tax increasing, big spending, blah blah blah. It's also been relatively clear the Democrats' incentives are aligned toward letting all the tax increases start up and then cut those back. But it's still unclear where the incentives rest on spending: cuts to defense, cuts to "discretionary" items, cuts wherever all have different and sometimes overlapping constituencies.

Is it really in the Democrats best interest to wait? In the GOP's best interests to wait? I don't know. I don't think anyone knows and I believe that because we don't see any serious analyses of what the balance of power will be come 1/1/13.

I'm not sure what the political advantage is here for Plan B. I guess there's the symmetry that now the Senate and House will have each passed their own incompatible bills on taxes. It's just theater, Boehner trying to argue that taxes are now done and off the table.

Democrats are holding most of the cards here, the republicans are kinda in a corner either way.

Scenarios:

A) Republicans block and obstruct a new deal. They are then further vilified and the "see, we told they're obstructist morons" claim gains even more momentum. Obama chastises them, and proceeds to offer a tax cut for 98% of Americans, it passes, and then Obama gets to say "do we really need to use this kind of work around, while you sit on your hands?". Total republican loss.

B) Republicans concede and go for a compromise with Obama. Now their own party radicals have even more ammo to fire at them for being turncoats and big government spenders.

I'd rather turn my back on the party radicals than the country at-large, but that's just me.

The problem with this idea is that while it could be great politics, it totally ignores the Republican interest groups.

Corporations, wealthy people, the entire Republican donor base do not value Republican ascendancy enough to want to hurt their bottom line to get there. Going over the cliff and sitting on their hands until 2014 watching the whole thing go up in flames would be asking a lot of Republican backers who would lose billions of dollars for the sake of retaking the Senate.

Furthermore, there's a fair bit of evidence that the cliff is not instant economic calamity. (Unlike the debt ceiling) So the economy could go over, take the hit, but there's no guarantee that the hit would last until 2014.

It's completely depressing. My company canceled its Holiday party because my boss is worried about paying higher taxes and doesn't want to shell out money for something as frivolous as a Holiday party. Terrible.

This is so ridiculous. I ran a small consulting business, and I made money by selling my technical expertise at a nice hourly rate. (I never could figure out a legal way to turn that income stream into dividends.) However, I can assure you I never would have turned down a job because my marginal tax rate might go up by 2%.

If your boss is being paid 300-1000K per year and the company revenue may be 2 orders of magnitude higher, and cancels the party fearing money - it is your boss problem, not tax.
I will give you a very posh party for 50 dollars per person, 200 attendees (that's a very large holiday party), that is 10K cost, 1/30th - 1/100th of your boss pay, depending what exact numbers you are using (and the fraction is likely to be lower - 1/30 as an aggressive estimate, most likely the party will cost 10-20 dollars per person if it causal).

Consulting is asset light. What if in your example the increase in tax rate made it no longer profitable to expand since returns aren't justified. A few percent of pre-tax profit can make a world of difference in some businesses.

I'm not so convinced that Obama's popularity would not fall considerably if the tax increases and sequester takes effect in January. While the GOP will take some of the blame, the spin keeps missing that there are two sides to every negotiation and Obama is president. GOP has been doing more compromising more than Dems so far. Both sides have much to lose and which side it will hurt more is somewhat unpredictable.

I think what you fail to understand is that the President won on these principles. MOST americans want tax increase on people making over 250,000, most americans disagree with short changing social security, medicare and medicaid. Raising the tax bar up to 400,000K by itself is a HUGE compromise. It's a shame politics dont represent the will of the people. I rather see us go over the fiscal cliff. Republicans have little chance in 2014, either way it goes.

"I think what you fail to understand is that the President won on these principles" - To assume that is to give legitimacy to the idea: "I think what you fail to understand is that the Republicans won their districts on their principles".

I have no doubt that liberals feel any compromise is a HUGE sacrifice. I also have no doubt Republicans feel the same about giving in to tax increases. That's why it called sacrifice. It isn't painless.

Why do Republicans have little chance in 2014. History is on their side being that its a non-president election year, and democrats will have more senate seats to defend. I wouldn't put it past republicans to choke, but democrats will likely start on the defensive. 2 years is a long time away in politics.

But we are only talking about a few percent increase on the dollars earned that exceed $250k, not the whole income. And reallly it is only on adjusted gross income that exceeds $250k, thus very few couples earning $260k or even $280k are going to see any increase in their taxes.

Your comments remind me how ass backward incentives have become for the bulk of Americans. Penalize success to reward mediocrity---yep, that will get us out of this mess.

It's unfortunate that the pendulum is swinging in the direction of a welfare state. People and businesses are driven by incentives...for starters the retirement age SHOULD be raised and social security should be privatized. Spending is the problem but the narrative has been focused on taxes despite their relative insignificance to the problem. Repeat---SPENDING is the problem. Social security + healthcare is the problem. Debt associated with social security is understated using the archaic cash accounting methodology---we are at the tipping point where rather than investing the surplus payments into social security in treasuries, the government is drawing them down. The present value of this shortfall brings about the eye-popping figures that are sometimes discussed in the press. Take into account the fact that the Fed is monetizing the debt and keeping rates low and this becomes more problematic down the road (2 tailwinds turning into a headwind). No amount of taxes will solve this problem. Period. The dems got everyone distracted from the real problem. The successful and job creators will be hollowed out of this country in a generation or two (to be generous) if the current policies are followed.

We'll see. I seem to remember a plethora of articles (particularly here) about Obama's deep game on other pieces of legislation that turned out to be nothing more than a seeming passivity; perhaps this time will be different, but I'm not hopeful.

Why would the White House think that they need to "break the Republicans"? The Republicans in the House seem to be doing a bang-up job on that without any administration assistance whatever. Of course, there is the risk that they may pull together and break the nation instead . . . .

I agree that Pres. Obama needs to actually govern without bowing to a reactionary GOP that won't go along with compromises, even when those "compromises" are the adoption of previous Republican positions.

They were and are determined to stonewall the black man in the white house, no matter how much the country suffers as a result.
Your analogy does not go far enough, Obama needs to shove that football south and to the rear of the Republicans' face.

Nowhere in this article does the writer even question the notion of whether the fiscal cliff is real. The Congressional Budget Office predicts a brief recession - but then says that NOT increasing taxes and cutting spending is a bigger problem long-term. Other economists even question whether going over the fiscal cliff will lead to any recession at all. It should be noted that the bipartisan debt commission that Obama formed released recommedations in December 2010 that included LOWER income tax rates (but higher gas taxes, treating capital gains like ordinary income, and reducing or eliminating most federal deductions) as well as spending cuts. Apparently, they did not fear a fiscal cliff, either.

This "Plan B" of Mr. Boehner is the best thing that happened in a while. It was almost sounding too familiar when Obama seemingly compromised with himself and put on the table an already watered-down proposal which was sure to be further watered down during the negotiations with the Republicans. But Plan B prevented that, apparently.

Laughable piece, particularly the end where the entirety of the budget issue is blamed on Republicans;

"Republicans have locked themselves into an impossible position on budgeting by simultaneously vowing never to allow taxes hikes, and passing long-term budgets that create a fiscal cliff necessitating tax hikes."

That, of course, fails to mention that they work for spending cuts to make up for tax revenues. These cuts are often agreed to by their Democratic counterparts on the condition that they take place a few years off. Then when the time comes to trim the fat the Left no longer has a taste for budget cuts.

The health care overhaul for instance ("Obamacare"). Benefit and tax increases were passed with the allusion of a "balanced budget" based upon cuts elsewhere. Such cuts (doctor reimbursement for instance) were considered as savings and have already been rolled back. This completely ignored prior precedent ("this time we actually will reduced reimbursement;" "this time we will be effective at cutting fraud") and "double budgeted" savings which were already part of prior "reforms" and included in the forward looking budget forecast.

The current landscape with the "fiscal cliff" is another (poorer) example. Prior policy which had a specific date for implementation (cuts, tax increases, etc) was considered unreasonable due to public opposition to such cuts.

As an aside, irrespective of whether republican policy of protecting "the 1%" is good or bad economic policy (I would argue that ensuring action which effects your largest contributors and most mobile class is correct policy), the nature of modern democracy (vote yourself more near term benefits at someone else's expense) will dictate that the same eventuality will be achieved. It is too politically advantageous to promote ideology and policy targeting such a population... The real discussion (in my opinion) hinges upon how individuals will and should react to such an environment and what sort of economic impact this will have. I will leave for another discussion my personal conclusions of: decreased domestic capital; increased before tax investment hurdles; and decreased incentive for incremental work/income.

The Democrats have every reason to go over the cliff, now that it's apparent that the Republicans will take the blame. Then everyone sane will be talking as fast as they can about tax cuts for the middle class, and increased budgets for almost every government program.

The Economist position is a complete whitewash of the historical democrat position on the Bush tax rates. When Bush introduced them years ago, the liberals and democrats cried that they were tax cuts for the rich, tax cuts for the rich, over and over again, for months that is all we heard. Replublicans correctly pointed out that you can't get a federal income tax cut if you don't pay income taxes. Now Obama and the left are claiming to be the champion of these same Bush tax rates claiming that if they go away, everyone in America will be affected. Where is the Economist's perspective on this?????

Nothing like red-tinted glasses to detect a long and consistent misreading of the US electorate by the GOP, starting before the 2010 elections. If the targets of opportunity they've chosen to rally around show one thing, it is that we like to enjoy our perks, don't want to pay for them and resent having the arithmetic rubbed in our faces.

Paraphrasing a towering political wit, the Americans will explore every conceivable alternative before defiantly and grumblingly coming around to doing the right thing. We love novels built on procrastinated rape.